Economy Grew at Slower Pace Than Thought in 4Q

WASHINGTON -- U.S. economic growth braked more sharply than initially thought in the fourth quarter amid a moderate increase in business inventories and a wider trade deficit, but strong domestic demand brightened the outlook.

Growth is poised to pick up in the first quarter now that the threat of an inventory overhang has diminished. However, an exceptionally cold and snowy February, as well as reductions in oil and gas drilling, could limit the pace of expansion.

%VIRTUAL-pullquote-The composition of growth is looking much better, we are setting up for a solid quarter for the economy.%"The composition of growth is looking much better, we are setting up for a solid quarter for the economy. The first quarter is still work in progress," said Ryan Sweet, a senior economist at Moody's Analytics in West Chester, Pennsylvania.

Businesses accumulated $88.4 billion worth of inventory in the fourth quarter, far less than the $113.1 billion the government had estimated last month.

That resulted in the GDP growth contribution from inventories being cut to one-tenth of a percentage point from 0.8 percentage point previously.

Consumers Spending Gains

The moderate stock accumulation came as consumer spending grew at its quickest pace since early 2006.

With households bullish about the economy's prospects, thanks to a tightening labor market and lower gasoline prices, consumer spending is likely to remain at lofty levels this year.

A second report showed the University of Michigan's final February reading on the overall index on consumer sentiment was 95.4, higher than the initial reading of 93.6.

While that was a retreat from January's reading of 98.1, it was the second highest level since January 2007.

"A more confident consumer is likely to spend more on big ticket items and other discretionary items, and looking ahead, we expect consumer spending ... to outpace 2014," said Kristin Reynolds, an economist at IHS Global Insight in Lexington, Massachusetts.

First-quarter growth estimates currently range between a rate of 2.4 percent and 3 percent.

U.S. stocks were little changed, while prices for U.S. government debt rose. The dollar was flat against a basket of currencies.

Robust Consumer Spending

Growth in consumer spending, which accounts for more than two-thirds of U.S. economic activity, was revised down by one-tenth of a percentage point to a 4.2 percent pace in the fourth quarter, still the fastest since the first quarter of 2006.

In another positive for the economy, business investment wasn't as weak as previously reported, with spending on equipment revised to show it rising at a 0.9 percent rate instead of the previously reported 1.9 percent contraction.

Growth in spending on intellectual products was the strongest since early 2000. All signs point to an acceleration in business investment in the first quarter, with data Thursday showing a rebound in spending intentions in January after four straight months of declines.

But lower oil prices have caused a drop in drilling and exploration activity. The impact is yet to be felt in the data.

Another report Friday showed factory activity in the Midwest in February plunged to its lowest level since July 2009.

Activity was likely dampened by bad weather and a long-running labor dispute at West Coast ports, which has since been resolved.

The Commerce Department data showed a key measure of domestic demand was revised to a 3.2 percent pace for the fourth quarter from the previous 2.8 percent rate. It was the third straight quarter of growth above a 3 percent rate.

Strong domestic demand sucked in more imports than previously reported in the fourth quarter, resulting in a trade deficit, which subtracted 1.15 percentage points from GDP growth instead of the previously reported 1.02 percentage point drag.

Muted Inflation

Despite the strong consumption, inflation pressures were muted, with the personal consumption expenditures price index falling at a 0.4 percent rate -- the weakest reading since early 2009. The PCE index was previously reported to have declined at a 0.5 percent pace.

Excluding food and energy, prices rose at an unrevised 1.1 percent pace, the slowest since the second quarter of 2013.

The low inflation environment suggests little urgency for the Federal Reserve to start raising interest rates from near zero, where they have been since December 2008.

Residential construction spending in the fourth quarter was revised down, while government spending was not as weak as previously reported.

The gross domestic product measures the level of economic activity within a country. To figure the number, the Bureau of Economic Analysis combines the total consumption of goods and services by private individuals and businesses; the total investment in capital for producing goods and services; the total amount spent and consumed by federal, state, and local government entities; and total net exports. It's important, because it serves as the primary gauge of whether the economy is growing or not. Most economists define a recession as two or more consecutive quarters of shrinking GDP.

The CPI measures current price levels for the goods and services that Americans buy. The Bureau of Labor Statistics collects price data on a basket of different items, ranging from necessities like food, clothing and housing to more discretionary expenses like eating out and entertainment. The resulting figure is then compared to those of previous months to determine the inflation rate, which is used in a variety of ways, including cost-of-living increases for Social Security and other government benefits.

The unemployment rate measures the percentage of workers within the total labor force who don't have a job, but who have looked for work in the past four weeks, and who are available to work. Those temporarily laid off from their jobs are also included as unemployed. Yet as critical as the figure is as a measure of how many people are out of work and therefore suffering financial hardship from a lack of a paycheck, one key item to note about the unemployment rate is that the number does not reflect workers who have stopped looking for work entirely. It's therefore important to look beyond the headline numbers to see whether the overall workforce is growing or shrinking.

The trade deficit measures the difference between the value of a nation's imported and exported goods. When exports exceed imports, a country runs a trade surplus. But in the U.S., imports have exceeded exports consistently for decades. The figure is important as a measure of U.S. competitiveness in the global market, as well as the nation's dependence on foreign countries.

Each month, the Bureau of Economic Analysis measures changes in the total amount of income that the U.S. population earns, as well as the total amount they spend on goods and services. But there's a reason we've combined them on one slide: In addition to being useful statistics separately for gauging Americans' earning power and spending activity, looking at those numbers in combination gives you a sense of how much people are saving for their future.

Consumers play a vital role in powering the overall economy, and so measures of how confident they are about the economy's prospects are important in predicting its future health. The Conference Board does a survey asking consumers to give their assessment of both current and future economic conditions, with questions about business and employment conditions as well as expected future family income.

The health of the housing market is closely tied to the overall direction of the broader economy. The S&P/Case-Shiller Home Price Index, named for economists Karl Case and Robert Shiller, provides a way to measure home prices, allowing comparisons not just across time but also among different markets in cities and regions of the nation. The number is important not just to home builders and home buyers, but to the millions of people with jobs related to housing and construction.

Most economic data provides a backward-looking view of what has already happened to the economy. But the Conference Board's Leading Economic Index attempts to gauge the future. To do so, the index looks at data on employment, manufacturing, home construction, consumer sentiment, and the stock and bond markets to put together a complete picture of expected economic conditions ahead.